Based on the internal technicals that I watch, the healthcare sector is starting to look really interesting here for a long.

I’m referring to the healthcare sector as defined by the S&P Healthcare Index by the way (the exchange traded fund for the sector is XLV) This index has been in an intermediate downtrend since the middle of March 2006 but there are a number of signs that there is a reprieve around the corner.

For one, the number of 52-week lows in the sector now outnumber the number of 52-week highs - a sign in the past that things are really oversold. As well, the percentage of stocks above their moving averages within the sector is quite low. And finally, the Rydex mutual fund assets for this sector are showing that it is being shunned (to a similar degree that it was in October 2005) by the often wrong but never in doubt, mutual fund trading crowd.

Finally, the bullish percent index of the sector is near levels which have presaged a reversal in the past:

Of course, that doesn’t mean that one jumps in and buys here willy nilly. I’d look for the strongest stocks within the sector and wait for an appropriate entry. One tell, for example, would be when the bullish percent turns up.

You already know that I’m partial to Merck. I still like it because it has one of the better technical pictures from among the big pharma companies.

I would also keep an eye out on biotech because it has similar underlying technical behaviour:

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